Swings in housing market put central banks on guard

Global policymakers have learned from the past and increasingly turned to "macroprudential measures" to curb price rises and credit growth

PUBLISHED : Saturday, 21 September, 2013, 12:00am
UPDATED : Saturday, 21 September, 2013, 2:29am

Five years after a financial crash that had its roots in a housing bubble, global policymakers are rapidly increasing the use of targeted lending curbs to head off destabilising booms and busts in the property market.

Authorities have introduced a range of non-monetary measures in the past year to dampen house price inflation and credit growth so borrowers and lenders alike are shielded somewhat when interest rates rise from historically low levels.

From Singapore to Sweden, from New Zealand to Switzerland, precautionary policy activism is gathering momentum.

Britain is debating whether a new housing bubble is inflating and what should be done about it, while Norway might become the latest country to require banks to hold more capital against home loans.

Given the post-mortems conducted into the origins of the crisis, policymakers are likely to keep rolling out such "macroprudential measures", according to Richard Fox, a senior director at Fitch Ratings in London.

"In those countries where you've still got a combination of rapid credit growth and strong property prices, there's been an increasing prevalence of these sort of measures," Fox said. "We haven't seen anything particularly drastic yet, but we're starting to see central banks trying to be a bit more innovative."

Macroprudential policies aim to reduce the vulnerability of the financial system as a whole rather than its component parts.

To skim the froth off property prices, measures are taken to reduce the supply of credit or make it more expensive, such as limiting the size of a loan relative to the value of the property and capping the share of a borrower's income going to service debt.

Other steps are putting a floor under the risk weights applied to property loans, increasing provisions on housing loans and limiting banks' exposure to the housing sector.

The evidence is that loan-to-value and debt-to-income caps, in particular, are hitting the mark.

"These measures have been found successful in containing exuberant mortgage loan growth, speculative real estate transactions and house price accelerations during the upswing," a new International Monetary Fund working paper said.

There has also been an element of self-regulation among lenders. Whereas in the boom years, home loans of multiples up to four or five times income were offered in some countries, those days are gone, at least for now.

By dampening the upswing, loan losses and fire sales are reduced when the cycle turns down.

A new database compiled by the Bank for International Settlements that covers 60 countries captures the post-crisis interest in smoothing the housing credit cycle. In the 1990s, 85 per cent of policy actions fell into the "monetary" category and 15 per cent were "prudential". Since 2010, the latter share has jumped to 39 per cent.

Ultra-low global interest rates have given some open economies little choice but to resort to macroprudential measures. Raising borrowing costs to douse property markets would have sucked in even more speculative capital and pushed up their exchange rates.

Singapore lowered its debt-to-income mortgage cap in June to 60 per cent. Concerned about growing household debt, the monetary authority estimated the proportion of vulnerable borrowers could rise to 10 to 15 per cent if mortgage rates - well below 2 per cent a year - were to increase by 3 percentage points.

With house prices at record highs, New Zealand is tightening loan-to-value ratios rather than raising interest rates. From next month, no more than 10 per cent of new home loans can go to mortgages that exceed 80 per cent of a property's value.

In February, Switzerland went much further when it became the first country to activate a countercyclical capital buffer for banks' domestic mortgages, requiring them to set aside an extra 1 percentage point of capital for home loans.

Norway's new government is likely to follow, with the extra capital requirement applied to all assets, according to Erik Bruce, an economist with Nordea in Oslo.